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Decision Making Under Certainty, Uncertainty, and Risk

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Decision Making Under Certainty, Uncertainty, and Risk

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  • June 16, 2008
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Decision Making under Certainty, Uncertainty, and Risk

Virtually all decisions are made in an environment to at least some’ uncertainty However, the degree will vary from relative certainty to great uncertainty. There are certain risks involved in making decisions.

In a situation involving certainty, people are reasonably sure about what will happen when they make a decision. The information is available and is considered to he reliable, and the cause and effect relationships are known.

In a situation of uncertainty, on the other hand, people have only a meager database, they do not know whether or not the data are reliable, and they are very unsure about whether or not the situation may change.

Moreover, they cannot evaluate the interactions of the different variables. For example, a corporation that decides to expand its Operation to an unfamiliar country may know little about the country’s culture, laws, economic environment, and politics. The political situation may be volatile that even experts cannot predict a possible change in government.

In a situation with risks, factual information may exist, but it may be incomplete. 1o improve decision making One may estimate the objective probability of an outcome by using, for example, mathematical models On the other hand, subjective probability, based on judgment and experience may be used

All intelligent decision makers dealing with uncertainty like to know the degree and nature of the risk they are taking in choosing a course of action. One of the deficiencies in using the traditional approaches of operations research for problem solving is that many of the data used in model are merely estimates and others are based oh probabilities. The ordinary practice is to have staff specialists conic up with “best estimates.”

Virtually every decision is based on the interaction of a number of important variables, many of which has e an element of uncertainty but, perhaps, a fairly high degree of...